Alan Greenspan: Failed To Predict Bubble Popping... And Failed In Predicting Home Taping Would Kill Music

from the innovation:-public-enemy-number-1-for-over-a-half-century dept

Even if SOPA passes in its current form, largely intact and full of overreach opportunities, there's no reason to believe this will be the last (or even the most overreaching) legislation crafted at the behest of the content industries.

Several of these analyses of alleged harm to the recording industry... were presented and debated during hearings on copyright... At each hearing, X presented the results of the most recent analysis done for the recording industry by his firm... [As] in his earlier testimonies, he stated that continued [copying] had grave implications for the viability of the recording industry. Noting that recording-industry releases were down by almost half since ****, and that industry employment had declined... X stated that further growth in [copying] would cause further decline in these industry indicators.

Karaganis asks: "So, who is X and what is the timeframe?"

If it's hard to guess, there's a reason for that. Because of the industries' insistence on turning every new "threat" into a federal case, this could have happened at any time in the last 50 years. Or it could be happening right now. The answer, however, is a bit surprising, considering who is being referenced.

Did you guess: Alan Greenspan in the early 1980s? Bravo.

To say that Greenspan's reputation has taken a bit of hit since stepping down as chairman of the Federal Reserve would be an understatement. To see that he wilfully (perhaps motivated by a donation) pled on the RIAA's and MPAA's behalf does nothing to resurrect his respectability. Karaganis quotes from a recounting of home taping battles, put together by the (now defunct) OTA (Office of Technology Assessment):

By 1986, industry stakeholders...had sponsored almost a dozen surveys and studies, usually to support or oppose passage of home-copying legislation. ... OTA noted:

In the 1985 analysis, sponsored by the RIAA, Greenspan estimated that in 1984, each instance of home taping cost the taper $1.67 per album equivalent, compared with an average retail price of $6.80. On the basis of an earlier report on home taping by the firm Audits & Surveys, Townsend & Greenspan estimated that 42 percent of all home tapings from prerecorded material and 40% of off-the-air (broadcast) tapings would have generated sales, if taping had not been possible. Then, assuming that 40 percent of home taping in 1984 was in lieu of purchases of records or recorded cassettes, the firm estimated 1984 retail losses of some $1.5 billion...

Moreover, as in his earlier testimonies, he stated that continued home taping had grave implications for the viability of the recording industry. Noting that recording-industry releases were down by almost half since 1979, and that industry employment had declined from 29,000 in the late 1970s to less than 19,000 in 1984, Greenspan stated that further growth in home taping would cause further decline in these industry indicators.

This sort of alarmism is very familiar to anyone paying attention. The refusal to recognize the technological advancement as being a possible ally to the industries is shrugged off in favor of panicked statements and questionable numbers. This very refusal to consider the "benefit" side of the argument is called out by the OTA and other industry groups:

Greenspan's two earlier studies had estimated losses...amounting to $1.05 billion for 1981 and $1.4 billion in 1982. The Consumer Electronics Group of the Electronics Industries Association (EIA), the Audio Recording Rights Coalition, and the Home Recording Rights Coalition (HRRC) submitted dissenting comments and testimony disputing these estimates. ... EIA claimed that the analysis for RIAA had ignored the stimulative effects of home taping on sales of recordings, and that some home tapes (e.g. selection tapes made for portable or car tape players) are not substitutes for prerecorded products... A pattern emerges in these debates. The published recording industry arguments and economic analyses deal only with estimates of alleged harms...

Much like the past decade, the RIAA and MPAA have spent an immense amount of time, energy and money attempting to place the blame for their economic downturn solely in the hands of infringers, completely ignoring other surrounding economic factors or the drastic changes in consumer habits. This selective blindness is nothing new:

[I]t's worth noting that Greenspan spent several years trying to pass stronger enforcement laws based on a scare story about a temporary dip in the market, as the cassette displaced the 8-Track and vinyl went into decline (and the US suffered a major recession). Stronger enforcement was a solution to maintaining the revenue levels associated with the LP and 8-Track. And he made this case at the beginning of the greatest boom period in the recorded music industry: the CD era. Now that the CD is dying, our present-day Greenspans are doing the same.

Everything continues to change but the arguments remain the same. The fact that Alan Greenspan delivered these remarks is somewhat surprising considering his later stance on IP issues. In a 2004 speech at the Stanford Institute for Economic Policy Research Economic Summit, Greenspan had this to say, seemingly forgetting his earlier efforts on the home taping battlefront:

"If our objective is to maximize economic growth, are we striking the right balance in our protection of intellectual property rights? Are the protections sufficiently broad to encourage innovation but not so broad as to shut down follow-on innovation? Are such protections so vague that they produce uncertainties that raise risk premiums and the cost of capital? How appropriate is our current system--developed for a world in which physical assets predominated--for an economy in which value increasingly is embodied in ideas rather than tangible capital?"

Greenspan is mostly referring to patents here, but a lot of what he says holds true across the rest of the intellectual property spectrum. There is a good possibility that Greenspan learned something from his earlier experience, recognizing the fact that technological progression tends to displace legacy industries, but it just as often creates new opportunities, provided it is not stifled by antagonistic legislation designed by the legacy industries in order to protect the status quo.

And about that status quo? Whose status quo is really being protected?

As the MP3 replaced the CD, the major labels cut their distribution costs, struggled to keep digital prices at rough parity with the CD, and pocketed the difference. An artist signed with a major label still makes 15-20% on wholesale-no more than for a good deal in the CD era. Many of the indie labels and digital aggregator services, in contrast, return 50-90% of the wholesale price to the artist. It is glaringly obvious that the major labels' 80% wholesale cut isn't sustainable-nor, I will predict, is Apple's 30% retail cut. Piracy was the messenger, not the message.

Costs have decreased across the board, but artists are still getting the short end of the stick. This isn't about them. It's about the labels, studios and their executives. Despite their constant complaints about how much sales have decreased, executive salaries have never been subject to the same downturn. Karaganis quotes The Lefsetz Letter:

Used to be running a label paid well, but it was mostly about the music, the lifestyle. Then, with the advent of MTV and the CD, suddenly Tommy Mottola was far richer than the acts. And Tommy and his ilk started hanging with other rich people in the Hamptons, they felt entitled to their wealth. Such that when Napster blew a hole in the paradigm, everybody was sacrificed but the top guy. The people running the labels are still as well paid as they were before Napster, before the recession. They're keeping up with the joneses, they're in charge, everybody's expendable but them. As for those people still working at the label...they're thrilled to have a job. Glad to be slaves on the plantation.

The arguments are old and repetitive and the rhetoric has expanded past "think of the poor artists" to "protecting jobs" to the outer reaches of credibility, conjuring up victims such as the US military and firemen. And that's because it's not really about protecting artists. It's about protecting industries which have become used to a certain "standard of living" and now the general public can't be as easily duped about sales numbers and executive salaries, all sorts of emotional buttons are being pushed in a very haphazard and desperate manner.

If it's any consolation, there will be more on the way. I highly suspect there will be never be a legislative solution to the problems of the content industries solely because much of the problem lies with the industries themselves.